Data

Date:: 01-10-1999
Country:: Australia
Number:: 996
Court:: Supreme Court of New South Wales
Parties:: Aiton Australian Pty Ltd. v. Transfield Pty Ltd.

Keywords

LONG-TERM CONTRACTS - CONSTRUCTION CONTRACT - BETWEEN TWO AUSTRALIAN COMPANIES - GOVERNED BY AUSTRALIAN LAW

AGREEMENT TO NEGOTIATE IN GOOD FAITH - CONTRACT CLAUSE REQUIRING PARTIES TO MAKE DILIGENT EFFORTS TO RESOLVE THEIR DISPUTE - ENFORCEABLE - REFERENCE BY COURT TO ART. 1.7 UNIDROIT PRINCIPLES

Abstract

The Plaintiff and the Defendant entered into a number of contracts in the framework of a construction project. The contracts contained a clause whereby the parties undertook to make diligent and good faith efforts to resolve all disputes before either party commenced mediation or legal action. However, when a dispute arose, Plaintiff commenced legal action; Defendant requested a stay of the proceedings, arguing that Plaintiff had breached its contractual duty to act in good faith to settle the dispute.

The Court pointed out that the general issue was whether agreement to negotiate in good faith was enforceable.

The Court held that, in the case at hand, Defendant had lost its right to rely on the contractual clause by reason of its own conduct. However, the Court added that, in general, an agreement to negotiate in good faith is enforceable. Moreover, the Court was even prepared to state that an obligation to negotiate in good faith, even if not expressly provided for in the contract, has to be implied in any alternative dispute resolution agreement. In order to confirm its conclusion, the Court made several references to the principle of good faith and fair dealing laid down in Art. 1.7 of the UNIDROIT Principles; in doing so, it cited with approval the decision rendered on June 30, 1997 by the Australian Federal Court in Hughes Aircraft Systems International v. Airservices Australia and bibliografical works which had expressly dealt with the principle of good faith.

Fulltext

[…]

The motion before the court is for a stay of proceedings.

The defendant seeks the stay on the basis that the contracts pleaded by the plaintiff, forming the basis of the plaintiff's claim, contain express procedures for dispute resolution to be followed prior to either party commencing proceedings. [...] The defendant asserts that such procedures have not been carried out, and therefore, the court ought stay the proceedings until the procedures have been followed. If successful, this application would amount to an indirect enforcement of those express procedures.

The Proceedings

The proceedings were commenced by the plaintiff, Aiton Australia Pty Ltd., by summons dated 21 May 1999. They concern the Osborne Co-Generation Project, a turn-key construction project for Osborne Co. Pty Ltd., an independent power producer situated in Adelaide, South Australia. In May and June of 1997 the plaintiff and the defendant, Transfield Pty Ltd., entered into three contracts in relation to the construction of the project. It is these contracts, and the tender negotiations leading up to the execution of the contracts, from which the dispute between the parties arises.

[…]

7. […] Each contract contained an express term and condition for dispute resolution procedure, in the terms of cl. 28.

Clause 28 of the Contracts provides:

[…]

The Purchaser [Transfield] and Supplier [Aiton] shall make diligent and good faith efforts to resolve all Disputes in accordance with the provisions of this Section 28.1 […]

[…]

24.The plaintiff's third submission is that in any event, the requirement of `good faith' imposed by clause 28 of the contracts, is not such as to `require of the parties participation in the process by conduct of sufficient certainty for legal recognition of the agreement': Hooper Bailie Associated Ltd. at 209. This is because (the plaintiff asserts) the concept of 'good faith' is too imprecise to give rise to an enforceable obligation.

[…]

It is the plaintiff's third submission, as to the certainty of the concept of `good faith', which commands greater substance.

[…]

It appears that cl 28.1 amounts to an agreement to negotiate disputes in good faith, as distinct from an agreement to conciliate disputes in good faith.

[…]

To my mind, this is a false distinction. As discussed below, the focus ought properly be on the process provided by the dispute resolution procedure. Provided that no stage of the dispute resolution mechanism is itself an `agreement to agree' and therefore void for uncertainty, there is no reason why, in principle, an agreement to attempt to negotiate a dispute may not itself constitute a stage in the process.

[…]

In a similar vein, the plaintiff submits that beyond the alleged uncertainty of the 'good faith' requirement, the process of mediation set out in cl . 28.2 lacks sufficient certainty to be given legal effect […]

[…]

The very nature of the words `good faith' must go toward the conduct of the parties involved in the agreed dispute resolution, as inclusion of those words connotes something more than mere attendance in the process.

[…]

I turn now to examine whether the words `good faith' in cl 28 have meaning of sufficient certainty to be enforceable.

23. It appears to be common sense that as an obligation to act in 'good faith' may, in principle, be legally recognized as an implied or imputed obligation, there is no reason why it should be struck down as uncertain in cases where there is an express contractual term, as in the present case.

[…]

28. A question arises as to whether the law surrounding the notion of 'good faith' as it relates to a general duty of good faith in the performance of a contract, can be imported to give content to the good faith requirement in cl 28.

[…]

To my mind, however, reference to what good faith is not, does not adequately give content to the obligation at any particular stage […]

The following observations of Brownsword, Hird & Howells (supra) go towards on an affirmative understanding of the good faith concept:

`It is commonplace that good faith can be read as having both a subjective sense (requiring honesty in fact) and an objective sense (requiring compliance with standards of fair dealing). [I interpolate to note the footnote reference to the UNIDROIT principles of International Commercial Contracts, Article 1.106(1) which provides that each party, in `exercising his rights and performing his duties ...must act in accordance with good faith and fair dealing'. The authors point out that the Commission takes `good faith' to mean `honesty and fairness in mind, which are subjective concepts', and `fair dealing' to mean `observance of fairness in fact which is an objective test'.] It is also commonplace that the most troublesome aspects of good faith relate to its objective dimension. In particular, if good faith is understood as prescribing standards of fair dealing, who are the good-faith standard setters, by what authority do they set such standards, and what are the standards that they so set?'

In this context, it is instructive to examine the impact lexicon plays in our understanding of the notion of good faith.

In light of the interest generated by international instruments such as the UNIDROIT Principles of International Commercial Contracts prepared by the International Institute for the Unification of Private Law (Rome: UNIDROIT, 1994), which specifically refer to a requirement of "good faith" in contracts, the Quebec Research Centre of Private and Comparative Law at McGill University set about preparing partner dictionaries, in French and English, which set out the fundamental vocabulary of Quebec private law.

`Good faith' as it relates to contracts, was chosen by the Editorial Committee as the first term to be presented as a sample in a paper published in advance of the release of the dictionary. The Editorial committee stated as follows:
`...the concept of good faith may now be thought of as one of the cannons of international contract law. Since the notion of good faith is seen as fundamental to understanding all aspects of the law of contract, civilians generally express surprise at how little place "good faith' occupies as a formal construct in the Common Law tradition. This is not to say "good faith" is absent in the Common Law - on the contrary - but its mode of expression is such that it may be buried in the cases of that tradition rather than expressed formally as an abstract principle. This is especially problematic when it comes to articulating "good faith" in English, the language most commonly associated with Common law parlance, in a document such as the UNIDROIT Principles. In this respect, the usage of good faith in English civilian parlance in Quebec is of particular interest.

It is often said that in Civil law, "good faith" is not only understood in a subjective manner but also objectively, whereas Common lawyers tend to measure "good faith" on a subjective basis corresponding essentially to a given actor's state of mind. In order to ensure the notions of "good faith" and "bonne foi" be taken as equivalents, the expression "good faith and fair dealings" was chosen to underline the objective aspect of "good faith" in the European Principles and the UNIDROIT Principles. In this choice of terms, there is a lingering sense that law's expression in French corresponds naturally to the Civil law and that English and Common law are also more natural partners. Yet, the English language may certainly be thought of as sufficiently elastic to express the civilian notion of good faith. English-speaking civilians in Quebec do not feel any need to add the expression "fair dealings" in order to make the scope of the notion of good faith clearer.

[…]

In my view, the authorities and academic writings referred to above demonstrate that while the content of any good faith requirement depends on context (statutory or otherwise) and the particular factual circumstances, it is possible to delineate an essential framework for the notion of `good faith' such that the requirement of `good faith' in cl 28 is sufficiently certain for legal recognition of the agreement.

[…]

[…]To my mind, but without being exhaustive, the essential or core content of an obligation to negotiate or mediate in good faith may be expressed in the following terms:

(1) to undertake to subject oneself to the process of negotiation or mediation (which must be sufficiently precisely defined by the agreement to be certain and hence enforceable).

(2) to undertake in subjecting oneself to that process, to have an open mind in the sense of:

(a) a willingness to consider such options for the resolution of the dispute as may be propounded by the opposing party or by the mediator, as appropriate.

(b) a willingness to give consideration to putting forward options for the resolution of the dispute.

Subject only to these undertakings, the obligations of a party who contracts to negotiate or mediate in good faith, do not oblige nor require the party:
(a) to act for or on behalf of or in the interests of the other party;
(b) to act otherwise than by having regard to self-interest.

[…]

As mentioned above, in my view on the evidence, Transfield has not dealt with Aiton's early claims in a manner which could reasonably be expected of a party in its position, particularly given the reference to `good faith' in clause 28.1 in respect of negotiations between the parties under that clause. Indeed, Transfield on my findings has sought to frustrate Aiton's attempts, where made, to regularly invoke the provisions of cl 28.

[…]

67. Notwithstanding the extensive judicial and academic comment on the appropriateness of requiring parties to adhere to dispute resolution clauses as a precondition to litigation in the face of evident reluctance on the part of certain players, it seems to me that strict compliance with a dispute resolution procedure by a party invoking the process [Transfield] is, subject to one matter, an essential precondition to being entitled to relief by way of enforcing, albeit indirectly, the other party to comply with the procedure. The proviso is that where both parties have agreed that something shall be done which cannot effectively be done unless both concur in doing it, the contract is construed to oblige each party to do all that is necessary to be done on his or her part for the carrying out of that thing, although there were no express words to that effect […]

[…]

If the above holding be incorrect, the finding is that clause 28, including the obligations to negotiate and to mediate in good faith, is sufficiently certain to be enforceable.

In the result, the application for an order staying the proceedings is unsuccessful.}}

Source

Original in English:
- Unpublished

Source:
- Internet website: http://www.austilii.edu.au}}